How Do Secured Credit Cards Work?

By: Stephanie Faris

Improving your credit score can seem like a catch-22. A secured credit card can help.

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In order to get credit, you need a solid credit score. But you can’t improve your credit score without credit. One solution to that catch-22 is a secured credit card, which has you put money down as a security deposit in exchange for a line of credit. If, for some reason, you can’t repay the amount you’ve charged, the lender can take that part of the deposit to cover it.

But as the borrower, you’ll likely have questions about how things will work on your end. The secured credit card is good for the lender because the money you spend is covered by the deposit, but it’s also good for you as a borrower. It lets you work to build credit so that you can eventually qualify for the credit cards and other loans you want. But before you sign on the dotted line, you should learn a little more about how the card will work.

The Cash Deposit

If you apply for an apartment, the landlord will often want a refundable deposit to cover any damage or cleaning fees when you move out. A secured credit card works similarly in that you put money down and draw on that deposit when you make purchases.

The amount of the deposit required depends on the creditor, but it can range from $49-$2,000 or more. Usually, your credit line is equal to the amount you put down, so the sole reason for getting one of these cards is to build credit.

Upgrading to an Unsecured Card

Almost as soon as you get your secured card, you’ll likely wonder how long it takes to qualify for an unsecured line of credit. Although terms can vary, you probably will be required to make 12 months of on-time monthly payments before your lender will let you upgrade.

Throughout this timeframe, you should also keep an eye on your credit score, since owing more than 30 percent in a given month can lower it, even if you’re paying on time. Once your credit score is solid, you should be able to apply for a credit card elsewhere if you aren’t happy with the terms your current lender is offering.

Finding a Lender

As you’re looking around for a secured credit card, pay particular attention to fees and security deposit requirements. There are many credit card providers offering competitive rates and terms, so don’t settle for the first one you see.

Even though you’re required to put down a deposit, you’ll also find lenders offering reward points and cash back on purchases, which will be a huge bonus as you’re trying to build credit. Also check into the rates and perks offered on unsecured credit cards for the lender you choose since the long-term plan is to upgrade once you’ve established credit.

If you’ve decided it’s time to build credit, save up the amount necessary for a cash deposit, then start shopping around. With so many lenders now offering unsecured credit cards, you should be able to find one that accepts the deposit you can afford, while also offering rewards and minimizing fees.